Column | Ballooning govt debt, populist measures mainly caused Sri Lanka's economic crisis

For an island with a population of 20 million people, Sri Lanka has remained a resilient nation in the face of many challenges. The country experienced a 30-year war which ended eventually; but the spirit of the people survived the war and its aftermath. Sri Lanka has remained relatively peaceful although simultaneous bomb blasts were set off by ISIS-styled extremists in churches and hotels on Easter Sunday in 2019, paving the way for President Gotabaya Rajapaksa to be elected by a landslide in a hotly contested Presidential election later that year.

Then came the pandemic which resulted in economic downturn and closure of the country’s thriving tourism industry. But the worst was yet to come; President Gotabaya Rajapaksa’s Government is now facing an unprecedented economic crisis on all fronts.

What fuelled the economic crisis

Central to the economic crisis Sri Lanka is facing are some of the short-sighted policy decisions taken by President Rajapakse’s regime as they came to power, promising national security and greater economic revival.

Shocked by the Easter Sunday blasts that killed and maimed many, Sri Lankans had been hopeful of a strong leadership and efficient style of government management under President Gotabaya but that didn’t exactly happen as they expected it to.

Piling up of debt and short-term fiscal policies executed by the Government are blamed, among many other reasons, for the current economic crisis

Verite Research, a Sri Lankan think tank recently published an analysis of the country’s debt stock – it shows that the total debt stock has grown by 42.8% between 2015-2019. At least 89.8% of the increase was due to the cost of interest accumulated on the debt obtained by the Government of President Mahinda Rajapakse; most of the loans from China went to fund colossal projects in his hometown of Hambantota but the projects have become white elephants, placing an incredible burden of debt on the nation.

Speaking to media, Executive Director of Veritas Research, Dr Nishan de Mel says that the worry currently is not just the amount of debt but the cost of debt as well. When interest accumulates, the debt keeps growing. Last year, 71% of the government revenue went into paying just the interest accumulated on the debt.

This has been a key factor in driving the economic crisis – there are other issues as well. The Government of President Gotabaya, upon election, took steps to cut taxes drastically, reducing the government income. Personal tax payers were given a 40% reduction in taxes while the VAT taxpayers saw a 70% reduction.

Dr de Mel points out that it had a huge impact on the revenue streams. He adds that when a Government makes momentous economic policy decisions, an anaylsis of the consequences should also be made.

The crisis has snowballed since the beginning of the pandemic. Lockdowns and closures have only added to the final outcome. For Sri Lankans, already burdened by the economic impact of the pandemic, the economic crisis seems to be the final straw as anti-government sentiments boil over into the streets.

Abrupt fertilizer switch too to be blamed

A contributory factor towards the current status is also the controversial decision taken by the President to halt chemical fertilizer and introduce a policy of organic fertilizer. For a country that is still primarily agri-based, this sudden decision clearly had an impact on everything from farming time to yields. Experts believe that such a drastic change should have been managed in stages instead of being introduced as a sudden measure. Farmer unrest broke out throughout the island as farmers protested against the fertilizer ban.

Low yields and smaller harvests worry farmers who grow commercial crops; everything from rice to vegetables and even commercially grown flowers are affected by the chemical fertilizer ban. And now, as farmers wait in queues for fuel for their threshing machines and tractors, Sri Lankans worry about possible food shortages.

Queues lengthen, power cuts worsen situation

As queues form across the country for fuel, cooking gas and powdered milk, the Government is facing an outpouring of unpopularity everywhere. Added to the burden are the daily power cuts which hamper all forms of activity.

Authorities are blaming the lack of US Dollars to purchase the much-needed fuel to power electricity and distribute to pumping stations; whatever reserves there are however small, are being kept to service the debt.

When remittances dropped

There were other factors as well that heralded in the economic downturn.

Although many expected the Sri Lankan Rupee to be free floated against the US dollar when it was evident a crisis was coming, the Government held on to the Rupee, creating a cascading effect that saw remittances of Sri Lankans working overseas, reduce. No one wanted a lesser price for their hard-earned foreign currency; they chose other means of sending in the money. As a key foreign exchange earner thus dried up, the Government eventually had to face the harsh reality when the Rupee was finally free floated recently. It will take time for the remittances to flow in but the free market currency principles would eventually set it right, economists believe.

In order to save the precious foreign currency reserves, the Government has banned many imports deemed not essential. This places a huge burden on key industries that rely on imports for sustenance.

Tourism, which is one of Sri Lanka’s strategic income streams, is impacted by power cuts, fuel crisis and an import ban on foreign liquor and fruits.

Yet what the Government does not seem to realize that the import bans have created a thriving black market for all things foreign. Available at a price across Colombo, these goods are often advertised on social media.

Angry public lament choices

Sri Lankans lament that they have not faced such a dire economic situation even during the war. Last week, two elderly men fell down and died while standing in queues for fuel. The people are angry and the mood is reflected in almost every aspect; from brawls at fuel stations to demonstrations with empty LPG cylinders at LPG refuel spots.

For the Opposition, the timing seems to be ideal to make the people aware of their choices – although an election is not due for a few more years.

Last week, the SJB (Samagi Jana Balawegaya) under the leadership of Opposition Leader Sajith Premadasa staged a massive protest in Colombo all the way up to the Presidential Secretariat. The rally was a success and resounded with the current mood of the people yet the ending with Premadasa calling on people to elect him as President, fell with a disappointing thud. He was accused of trying to use the crisis to fuel his long-held presidential aspirations but analysts believe that Premadasa is often driven by his own personal agenda as opposed to a national one.

A few days later, the JVP (Janatha Vimukthi Peramuna) which presents an alternate path in the opposition, staged their own protest, flexing their socialist muscles. They rallied all the way up to the Presidential Secretariat and warned the Government of taking drastic action while also warning Premadasa not to seek personal glory as people suffer shortages.

In the end, for the people, it seems neither of the opposition alliances nor the Government, has the best interests of the people at heart.

“This is a game they play,” says an unnamed Sri Lankan languishing in a queue for fuel since early morning. “When they are in power, they shout for change and promise many things. We fall for that and elect them into power. Then the other side starts shouting and promises change. Nothing happens when they come to power either. This is a cycle that has been happening since independence."

Dynastic politics, a curse

In a country with dynastic politics at work just like in many of her neighbours, Sri Lanka’s Bandaranaikes and the Senanayakes are today replaced by the Rajapakses – the family came into spotlight under President Mahinda Rajapakse and were reinstated when President Gotabaya Rajapakse won a landslide election as President in 2019. In the general election of 2020, the Rajapakses came back to power; today, Basil Rajapakse, another brother is the Finance Minister, while the eldest brother Chamal is a cabinet minister and nephews and sons hold key government positions.

Sri Lankans have now come to condemn the Rajapakse Family as a curse on the nation. Most of the blame lies at the feet of the family since much needed to be done sooner than later. Basil Rajapakse, the Finance Minister, has been blamed for his lacklustre and poor handling of the economic crisis. There were differences of opinions between him and Ajith Nivaard Cabraal, the Governor of the Central Bank.

Eventually, as the crisis deepened, Basil Rajapakse went to India this month where he was able to secure a USD 01 billion credit line to buy the much-needed medicines and fuel.

Situation may worsen further

The Government is talking to IMF on managing the economic downfall yet many worry that too little too late may cause great damage to the economy before restoration takes place.

Critics point out that mismanaging the crisis has made it worse – debt restructuring would need to be followed by curbs to government spending and a hike in interest rates. Neither seems to be happening yet; the ministers, MPs and other government officials are yet to cut down on their expenditure although the people have been asked to limit usage of power and transport in order to minimise usage.

Currently, with about USD 02 billion in foreign currency reserves while a total debt repayment of as much as USD 07 billion looming which includes a USD 01 billion bond due

to mature in July this year, critics fear that Sri Lanka might be facing default and ultimate economic downfall unless the Government speeds up the restructuring and effective management of the crisis.

(Nayomini R Weerasooriya is a journalist based in Sri Lanka.)